1. Field of the Invention
The invention relates to computer systems and computer implemented methods for performing matching in financial instrument markets and, more particularly, performing matching in derivative markets.
2. Description of the Related Art
Derivates such as futures or options have become increasingly important in the world of finance. Futures and options are now traded actively on many exchanges throughout the world. A derivative is a financial instrument whose value depends on or derives from the values of other, more basic underlying variables. Very often, the variables underlying derivatives are the prices of traded assets. A stock option, for example, is a derivative whose value is dependent on the price of a stock.
A derivative exchange is a market where individuals trade standardized derivatives contracts that have been defined by the exchange. Traditionally, derivatives traders have met on the floor of an exchange and used shouting and a complicated set of hand signals to indicate the trades they would like to carry out. This is known as the open outcry system. In recent years, exchanges have increasingly moved from the open outcry system to electronic trading.
A futures outright contract is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price. An options outright contract specifies an agreement between two parties for a futures transaction on an asset at a reference price (strike price). The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. Options and futures contracts are normally traded on an exchange such as the Eurex.
Generally, there are many different kinds of outright contracts, reflecting the many different kinds of tradable assets (also denoted as underlying in the context of derivatives) on which the outright contract may be based. Underlyings of an outright contract may be, for instance, commodities, securities such as stocks, bonds, currencies or intangibles, such as interest rates and indexes. Futures or options on currencies, financial securities or on financial indices are also called financial futures or financial options, respectively.
Derivatives traded on an exchange such as the Eurex may be associated with several expiration dates. Each outright contact is associated with an expiration date.
Spread contracts (also referred to as double leg combinations, outright spread contracts, calendar spread contracts or simply spreads) are double leg outright contracts combining two different single leg outright contracts with a leg ratio equal to one for both single leg outright contracts but different buy/sell indicators. Thus, a spread may be defined as the simultaneous purchase of one single leg outright contract and the sale of another single leg outright contract.
When using an electronic trading system, the bid and ask orders of a single leg outright derivative contract are stored in the corresponding single leg outright order book and the bid and ask orders of a double leg outright contract are stored in the corresponding double leg outright order book independent of the single leg outright orders of the single leg outright contracts contained in a double leg outright contract. An order book is crossed if the best bid price is equal to or greater than the best ask price. During the continuous trading phase of an exchange, in case an incoming order results to a crossed order book, the incoming order needs to be executed immediately against book orders of the outright order book side opposite to the incoming order until the crossed order book situation is resolved. Thus, during the continuous trading phase, a crossed order book situation in an outright contract never occurs. The immediate execution of an incoming order against one or several book orders is also referred to as matching.
In conventional electronic trading systems of derivatives exchanges, matching of incoming orders exclusively considers the outright order book where the incoming order is related to but does not take into account matching opportunities which may result from combinations of single and double leg outright order books different from the outright order book of the incoming order. This results in a non-optimal matching of derivatives.